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Welcome to The Pentad Group
Dear Kate,
Wall Street is down 300 points,
another large financial services firm files bankruptcy and a new
president will be elected in less than 40 days - these are the
headlines we've all read and heard over the past few weeks. The
questions we ask ourselves, what does this mean for business? How
will these news stories affect our day-to-day lives?
At the Pentad Group, we are forging
ahead with two new practices this year - Internal Audit and Information
Technology, as we continue to build our core Accounting & Finance
practices. Also, although the Securities and Exchange Commission
(SEC) anticipates mandatory compliance of International Financial Reporting
Standards (IFRS) in 2014 for publicly traded companies in the U.S., we
have already begun to train and prepare our employees for this new
requirement. Now is not the time to stop
good business practices, but instead to move-ahead and make the
most of these tough economic times. Read-on to learn more about
IFRS, as well as more about our Internal Audit Practice.
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Project
Spotlight: internal audit engagement at technology firm
The Pentad Group was engaged to conduct an operational and
financial audit to assess the effectiveness and efficiencies of
processes related to provisioning, billing, and customer credits at one
of the client's business units.
The objectives for the audit included gaining an understanding of the
procedures and the internal controls from both a financial and
operational perspective, of the procedures in this
department. An additional goal of the project was to
identify opportunities to improve the process and practices, and
determine adequacy of compliance with provisioning and billing policies
and procedures based upon transaction samples.
The scope of this two-month engagement encompassed new customer setup
activity, changes to existing orders, assessment of disconnected
orders, new customer trials, review of billing adjustments and credits
and evaluation of key provisioning and billing system risks. The Pentad
Group consultant initiated the project by interviewing key management
personnel regarding the provisioning and billing processes. The
next steps included obtaining and reviewing both open customer
trials, and billing adjustments and credit issues. The final
phase of the project included gaining an understanding of the
procedures and related internal controls, then testing a representative
sample of provisioning and billing activity processed through the
relevant systems utilized.
The Pentad Group's deliverable
included an Executive Summary, detailed observations and management
action plans. Over the past four years, the Pentad
Group team has been engaged to assist this client with
several additional projects, including Sarbanes-Oxley compliance
initiatives and general accounting and finance support.
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What do you need to know
about internal audit? A guide to sourcing your Internal Audit
Department
Co-sourcing or project outsourcing has become an
attractive alternative for non-core functions of many companies, for
many reasons including cost, specialty expertise, freeing-up resources
to focus on core competencies and the value of an outside
perspective. The Internal Audit function is one non-core
functions that many organizations look for outside support. Some
companies may have an well-functioning Internal Audit Department
already, while others are just beginning. The following Q & A
session will help you ensure you are on-track, or help guide you to
building an internal audit department.
What
is the definition of internal auditing?
According to the Institute of Internal Auditors (IIA) internal auditing
is an independent, objective assurance and consulting activity designed
to add value and improve an organization's operations. It helps an
organization accomplish its objectives by bringing a systematic,
disciplined approach to evaluate and improve the effectiveness of risk
management, control, and governance processes over all finance and
operational functions within an organization.
Who needs
an Internal Audit Department?
In 2004, the SEC approved the New York
Stock Exchange (NYSE) listing standards, stating, "Listed
companies must maintain an internal audit function to provide
management and the audit committee with ongoing assessments of the
company's risk management processes and system of internal
control." Yet, while only companies traded on NYSE are
required to have an internal audit department, over 80% of all
U.S. publicly traded companies have an internal audit function,
according to IIA. The primary reason the
overwhelming number of companies have decided to have internal audit
functions is due to the compliance requirements and risks associated
with Sarbanes-Oxley.
What
should a company spend on Internal Audit?
The amount a company spends on
Internal Audit related activities should depend on the level and
complexity of risks, the number of locations, the size of the
organizations and the responsibilities given to the internal audit
function. A study by the IIA identified a wide range, between
0.03% and 0.2%, of revenues allocated to an internal audit budget.
Actual budgets vary widely. Financial risks, operational risks
and responsibilities of the internal audit department should be a key
factors in determining the level of expenditures and resources
required to adequately staff and supply the internal audit
department.
How
should a firm staff their Internal Audit department and what is the
reporting structure?
Companies with a significant number of
risks or complex risks will require various specialists and
experts. Many internal audit departments are headed by an Internal
Audit Director, and include staff, such as managers, senior
auditors, and staff auditors. Other companies rely on in-house
professionals or tap into the specialized skill sets of outside
providers. Typically, the Internal Audit Department will report
to the Board of Directors, with a dotted-line relationship to the Chief
Financial Officer. Companies will require an internal audit
department with varied skills and expertiseproportionate to the number
and/ or complexity of the risks they face.
The Pentad Group's Internal Audit Practice is here to help companies
both strategize on plans for their Internal Audit Department, as well
as execute financial and operational audits. For more information
on The Pentad Group's Internal Audit practice, contact Christine Downey
at cdowney@thepentadgroup.com
or at (617) 620-8233.
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Accounting & reporting in a global economy
International Financial Reporting Standards (IFRS) are a set of
accounting standards published by The International Accounting Standards
Board (IASB). In the United States, the pronouncements of Financial
Accounting Standards Board (FASB) are deemed to be authoritative and "generally
accepted." In the US, companies follow US Generally Accepted
Accounting Principles (US GAAP) to record transactions and prepare
financial statements. Elsewhere, in about 100 countries, companies are
required or permitted to follow IFRS for the same purpose. This makes it
difficult to compare, analyze and consolidate financial statements
prepared using differing account standards.
IFRS is becoming the global standard for the preparation of
financial statements of publicly-traded companies. FASB and IASB are in
the process of converging IFRS and US GAAP towards a single set of
standards. This would allow businesses to present their financial
statements on the same basis as their foreign competitors. US companies
with subsidiaries in countries that require or permit IFRS may be able to
use one accounting language company-wide. US companies also may need to
convert to IFRS if they are a subsidiary of a foreign company that must
use IFRS, or if they have a foreign investor that must use IFRS. This convergence
may also benefit companies that wish to raise capital abroad.
US regulators have started laying the groundwork for the convergence of
US GAAP and IFRS. In 2007, the Securities and Exchange Commission (SEC)
allowed foreign private issuers to file financial statements prepared in
accordance with IFRS without reconciliation to GAAP. Earlier this year,
SEC issued a Concept Release seeking input on allowing U.S. public
companies to use IFRS when preparing financial statements. The American
Institute of Certified Public Accountants (AICPA) has recognized IASB as
an international accounting standard setter. This will give private
companies and not-for profit organizations the option of following IFRS.
Further, SEC voted to publish for public comment a proposed Roadmap that
could lead to the use of IFRS by U.S. issuers beginning in 2014. The
Commission is planning to make a decision in 2011 on whether adoption of
IFRS is in the public interest and would benefit investors.
Implementation of IFRS is more than a stand-alone finance &
accounting effort. It may also impact performance reporting, taxation,
executive compensation, financial covenants in contracts, valuation of
assets, investor relations, dividend distribution policies, and
regulatory capital. An implementation of IFRS requires sponsorship from
senior management and a project-driven approach. The costs would be
largely determined by the size and nature of the business. However, a
planned, efficient and well-managed implementation with the help of an
experienced team will make the IFRS implementation cost-effective and
allow the company to gain from IFRS. It might also result in a reduction
of capital and operational costs related to financial reporting!
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